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It's only natural that many investors, especially those who are new to the game, prefer to buy shares in 'sexy' stocks with a good story, even if those businesses lose money. But as Peter Lynch said in One Up On Wall Street, 'Long shots almost never pay off.'
So if you're like me, you might be more interested in profitable, growing companies, like Big 5 Sporting Goods (NASDAQ:BGFV). Now, I'm not saying that the stock is necessarily undervalued today; but I can't shake an appreciation for the profitability of the business itself. While a well funded company may sustain losses for years, unless its owners have an endless appetite for subsidizing the customer, it will need to generate a profit eventually, or else breathe its last breath.
How Quickly Is Big 5 Sporting Goods Increasing Earnings Per Share?
If a company can keep growing earnings per share (EPS) long enough, its share price will eventually follow. It's no surprise, then, that I like to invest in companies with EPS growth. Impressively, Big 5 Sporting Goods has grown EPS by 18% per year, compound, in the last three years. As a general rule, we'd say that if a company can keep up that sort of growth, shareholders will be smiling.
I like to see top-line growth as an indication that growth is sustainable, and I look for a high earnings before interest and taxation (EBIT) margin to point to a competitive moat (though some companies with low margins also have moats). While revenue is looking a bit flat, the good news is EBIT margins improved by 3.6 percentage points to 4.5%, in the last twelve months. That's something to smile about.
In the chart below, you can see how the company has grown earnings, and revenue, over time. For finer detail, click on the image.
Since Big 5 Sporting Goods is no giant, with a market capitalization of US$195m, so you should definitely check its cash and debt before getting too excited about its prospects.
Are Big 5 Sporting Goods Insiders Aligned With All Shareholders?
I like company leaders to have some skin in the game, so to speak, because it increases alignment of incentives between the people running the business, and its true owners. As a result, I'm encouraged by the fact that insiders own Big 5 Sporting Goods shares worth a considerable sum. To be specific, they have US$23m worth of shares. That's a lot of money, and no small incentive to work hard. That amounts to 12% of the company, demonstrating a degree of high-level alignment with shareholders.
It's good to see that insiders are invested in the company, but are remuneration levels reasonable? A brief analysis of the CEO compensation suggests they are. For companies with market capitalizations between US$100m and US$400m, like Big 5 Sporting Goods, the median CEO pay is around US$1.1m.
Big 5 Sporting Goods offered total compensation worth US$863k to its CEO in the year to . That comes in below the average for similar sized companies, and seems pretty reasonable to me. CEO remuneration levels are not the most important metric for investors, but when the pay is modest, that does support enhanced alignment between the CEO and the ordinary shareholders. It can also be a sign of good governance, more generally.
Does Big 5 Sporting Goods Deserve A Spot On Your Watchlist?
For growth investors like me, Big 5 Sporting Goods's raw rate of earnings growth is a beacon in the night. If that's not enough, consider also that the CEO pay is quite reasonable, and insiders are well-invested alongside other shareholders. This may only be a fast rundown, but the takeaway for me is that Big 5 Sporting Goods is worth keeping an eye on. It is worth noting though that we have found 3 warning signs for Big 5 Sporting Goods (1 is a bit concerning!) that you need to take into consideration.
Although Big 5 Sporting Goods certainly looks good to me, I would like it more if insiders were buying up shares. If you like to see insider buying, too, then this free list of growing companies that insiders are buying, could be exactly what you're looking for.
Please note the insider transactions discussed in this article refer to reportable transactions in the relevant jurisdiction.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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